ECONOMYNEXT – Sri Lanka’s state-owned enterprises that borrow abroad face prohibitive risk premiums if they require sovereign guarantees, as part of protections placed to prevent the next sovereign default, opposition legislator Harsha de Silva said.
Agencies like SriLankan Airlines and Ceylon Electricity Board which reject private investments will face problems in raising finance and taxpayers will end up taking the tab, he said.
“If a state-owned enterprise wants to borrow in the international market, unlike in the past where they got guarantees without any questions being asked, they have to look at what is called a stress test,” de Silva told parliament after the repeal of the old Foreign Loans Act.
“There is a tool provided by the International Monetary Fund. And they will look at the ability of that enterprise to make repayments, or service the debt, and based on that, they will say you have to pay the government of Sri Lanka such a premium.”
The Ceylon Electricity Board had recently tried to get a sovereign guarantee to get a relatively small 50 million dollar loan from China’s AIIB, de Silva said.
“It is a drop in the ocean for the CEB, because it needs thousands of millions of investments,” de Silva said.
“Once it went through the stress tests, you know what they found out? That the CEB must pay 4.8 percent as premium to the government of Sri Lanka to borrow just 50 million dollars from the AIIB.
“Now you see the problem? This is where we are going.”
An amendment to Sri Lanka’s Electricity Act tabled in parliament, prevented private investments into transmission and distribution, which may be a problem for the agency.
The CEB in particular needs massive investments into its grid to accommodate renewable energy and prevent cascading blackouts from intermittent renewable energy.
“And I am telling you. I am not blaming you, I am not accusing you. I love this country as much as you do or anyone else. You cannot do this. Because you cannot raise this money.”
Battery storage for renewables may cost around billion US dollars, de Silva said. The CEB is also planning pump storage plants which last for decades.
CEB was unlikely to be able to pay the 4.8 percent to the government, De Silva said. With the loan itself costing 3 to 4 percent, funding may costs over 7 percent, de Silva said.
Placing prudential limits on sovereign guarantees is part of efforts to prevent a second sovereign default.
Sovereign guarantees turned out to be a tool used by macroeconomists who ran Sri Lanka’s Treasury to understate the national debt and budget deficits, until the country ended up in a sovereign default after a currency crisis triggered by extreme rate cuts, according to critics.
One of the key strategies was to get the Road Development Authority to borrow on its own, bypassing the budget, despite the agency not having any revenues.
Though the RDA got revenues from expressways, they also had loans of their own to service.
In 2003, after a 2001 currency crisis pushed up debt, a Fiscal Management Responsibility Act limited sovereign guarantees to 4.5 percent of GDP.
De Silva said subsequently the limit was raised to 15 percent of GDP.
One of the sovereign guarantees was given to SriLankan Airlines to borrow through a 175 million dollar bond, when the SOE was already making losses, instead of on-lending the funds and capturing the data in deficits and debt.
The loan was now in default. Pending its re-structure, Standard and Poor’s has refused to raise Sri Lanka’s sovereign rating above default.
The investors holding the debt of SriLankan Airlines are unlikely to agree to a restructuring without a sovereign guarantee, de Silva said.
“Therefore it is double jeopardy, because we can’t pay the premium in my view,” de Silva. “If that is not the case somebody can explain later on.”
The sovereign guaranteed bond also does not have the latest collective action clause, legal analysts have said. (Colombo/May26/2025)
Continue Reading
